MORE SERVICES

Charity Blues

December 6, 2012
•
Eric Rasmussen

Susan Colpitts, an advisor in Norfolk, Va., and a co-founder of the firm Signature, recalls that she got a call one night from Mothers Against Drunk Driving wanting to know if she would donate. She had three teenage daughters and believed in the cause, so she gave. She knew the need for fund-raising because of her work with the local symphony.

Later, though, she got a bit of a sinking feeling when the Veterans of Foreign Wars also called. The form they sent looked exactly the same. “That kind of indicated to me that it was a telefunding company and they were probably taking a big slug of it,” she says.

Many people shudder when they hear stories about injured veterans or people suffering from diabetes or the plight of school-age girls in war-ravaged nations like Pakistan, and their feelings of altruism (and maybe guilt, too) often lead them to open hearts and purses. They take it on faith that most of this money is going to the people who need it.

What they sometimes find instead (to their horror) is that much of the money is consumed in transit—going to the calling centers collecting it.

In September, Bloomberg Markets magazine reported that 80% of the money raised by Akron, Ohio, telemarketing company InfoCision on behalf of the American Diabetes Association would never reach the association’s programs. That follows similar reports by CNN on similar contracts that direct mailing company Quadriga Art, New York, inked with the Disabled Veterans National Foundation. These charities had reportedly gotten into lengthy contracts with the fund-raisers that left them at a disadvantage for several years in hopes they would build a donor base. Quadriga sucked up almost all of the money that supposedly went for the veterans and other charities’ missions, CNN said. In some cases, after a few years the charities still owed the direct-mailer money. Quadriga CEO Mark Schulhof says in a video on the company Web site after CNN’s piece came out that the company had not made a profit off the DVF. InfoCision says on its Web site that reports about it in the media are misleading and that the company actually loses money on fund-raising. The revenues are passed through and cover expenses, it said.

Some financial advisors say they’ve been caught unawares. Lauren Lindsay, a CFP in Covington, La., is a big booster for the March of Dimes, having mothered a premature baby herself. She was furious to find out after she had raised hundreds of dollars for the March of Dimes from her neighbors, that InfoCision was involved, something she heard about on NPR. The charity called back again this year to ask her to raise money again, but now she gives to the March of Dimes directly.

“I was livid when I heard about it,” says Lindsay, the director of financial planning at the firm Personal Financial Planning. “What I am not sure of now is how to really vet [such charities], since the story said the telemarketers are told to lie and say that a percentage of the profits go to the cause, when in fact, many times the charity ends up owing the telemarketing service in the hopes that they have a good set of names to go to next time.”

These stories raise the question: How do advisors make sure the charities their clients give to are on the up and up? Especially when advisors themselves are not always sure? How do advisors glean information from the variety of forms and sources and make sure a charity is actually doing what it says it does? How do they know the charity isn’t hoarding its donations, perhaps building up big reserves, or has entangled itself in punitive contracts with the third-party telefunders or spent too much money on promotions and galas?

Daniel Borochoff has made it his job to find out. He’s a founder of the 20-year-old American Institute of Philanthropy, also known as Charity Watch, which puts out a newsletter three times a year of 600 charities, rating the good the bad and the ugly. Charity Watch helped break the story about Greg Mortenson, the author of Three Cups of Tea and founder of the Montana-based Central Asia Institute, which sets up girls’ schools in Pakistan. The book was an inspirational tale about Mortenson’s journey through Afghanistan and Pakistan, and he even got a piece of Barack Obama’s Nobel Prize money for his efforts.

But he was later ignominiously caught in the crosshairs of 60 Minutes when independent investigators and journalists, including Charity Watch, said the Central Asia Institute had spent much of its donations on book advertising, tours and private jets while many of the girls’ schools were empty, abandoned, holding grain, or, if they were functioning, not receiving much money from him. Journalists piled on, accusing Mortenson of fabricating some of his tales, one of which was that the Taliban had once kidnapped him. The revelations launched lawsuits and attorney general inquiries, including one by the Montana Attorney General’s Office in April in which Mortenson agreed to repay $1 million to the charity.

Critics say he was using his charity as a bank while supporters who continue to extol his work say he was simply tragically disorganized. Borochoff says that, to unravel charities’ misdeeds, his organization simply uses good shoe-leather reporting and pores over the charity’s audits—or in Mortenson’s case, finds out there weren’t any. (One of the tell-tale signs, Borochoff says.)

“We scrutinize the audits and tax forms and audit Web sites to see if what they say matches up with how the finances are,” Borochoff says. “We went to [Mortenson’s] Web site and noticed that there’s all this promotion for ads, for books, for speaking engagements. You can pay $35,000 to hear him speak. Now where’s the royalties? Where are the revenues from speaking engagements? And we look at the finances and find out that it’s all in Mortenson’s pockets. They don’t have any audits.”

Borochoff says there are a lot of red flags that researchers could look at to tell if a charity is spending too much of its money on fund-raising and not getting the money to programs. He says these nonprofits should be spending 75% or more of their contributions on services and that it should cost $35 or less to raise $100 if a charity is efficient.

Many people investigating charities start with IRS Form 990 for tax-exempt organizations. This form has become easily accessible to the public on the Internet through sites like GuideStar and the Foundation Center.

Another charity watchdog group, Charity Navigator in Glen Rock, N.J., looks at the amount of funding that goes to a charity’s expenditures and sees if they are 80% or more of the fund’s inflows, says Sandra Miniutti, Charity Navigator’s CFO. The nonprofit rates some 6,000 charities on a four-star scale.

She takes, for example, one of the lower-rated nonprofits in its universe, a firefighters’ charity on Long Island that’s got zero stars. If you go to the non-profit group’s Form 990 for 2010, she says, you can hop down to page 10 and look at the charity’s expenses. On Column A will be total expenses, on Column B program expenses. Column C is management and general (or administrative, she calls it) and Column D is fund-raising costs. The form says that this firefighters’ charity spent $5.3 million of its $6.2 million in total expenses on fund-raising.

“So if you crosswalk that with our rating, we’re showing that almost 86% of their budget was spent on fund-raising expenses and less than 8% went to programs,” Miniutti says. “That’s woefully inefficient.”

Below that is Line 26, joint costs, or SOP 98-2 accounting. She says that here, too, there is room for fudging. A charity can say it used some of its joint costs for raising awareness as part of its mission—in other words, by doing nothing more than calling people. That allows it to misleadingly call some of those expenses program costs. Charity Navigator often yanks such costs right back out.

“We look at the nature of that activity,” she says. “In our experience, it is just fund-raising unless you have a group that’s really all about advocacy. We disregard those joint allocations and kind of unwind it and put it back into fund-raising [when we rate] because we think that’s troubling. We don’t think donors want their money going toward what is essentially an appeal.”

“What they call a program,” adds Borochoff, “might not be considered a program at all. That’s why it’s important to get that clear.” In other words, accountants might allow a charity to call something they are doing a program if they are simply making you aware of it. “When they tell you [on the phone] to buckle your seatbelt, the way they are telling you, they can allocate the costs of the telemarketing cost to programs, not to fund-raising. Those are little clues. One of the common deceptions going on is you’re asked [on the phone call] if you have helped a veteran or a policeman or a firefighter. All you’re doing is helping the charity promote themselves. The [caller] is making people aware that there’s a problem rather than doing something about the problem.” The charities can fudge further on some forms by saying they pay for “scientific research” that might actually be market research, he says.

Another warning sign, says Miniutti, is that there isn’t a diverse board of directors running the organization, which she says was a tip-off in the Central Asia Institute scandal. “The lesson there and also with other charities that sort of imploded in scandals is governance. And so one of the things we check, and you can pull it off the 990, is whether or not the organization has at least five independent voting board members, and in the case of the charities affiliated with the Central Asia Institute, they didn’t have that. It was pretty much the founder and the buddy.” (In July of this year, the institute announced it had brought aboard seven new board members; Mortenson stepped down from the executive director position in November 2011.)

A donor might simply check to see if a charity has a connection with a company like InfoCision or Quadriga Art. If it’s a telefunder, Borochoff says you might ask to see the contract.

“You might find the terms are very unfavorable and it’s of great importance who controls and owns the mailing list. Some charities are foolish enough to let fund-raising companies control the mailing list.” That locks the charities into arrangements with the fund-raising company, he says. Charities get talked into these situations because they think it will build up lists for future use. But for the donor, it’s a rip-off, he insists.

Much of these points might seem moot to financial advisors, whose wealthy clients would be unlikely to give over the phone. Yet the rich have other ways to be duped—through their warrens of trusted social networks, Miniutti says. A lot of charities had bad ratings for a few years because of the Bernard Madoff scandal—when they trusted people on their boards who, in turn, trusted him. “People on their board who said, ‘Yeah, yeah, yeah! He’s my buddy. I have my money with him. It’s all good, don’t worry.’ And you know the charities lost a lot of money in that and they had to give the money back and it was a big mess.”

Yet charities still want to recruit board members who bring financial acumen, working with people they already invest with rather than doing the due diligence. For that reason, Miniutti predicts there will be more charity scandals—since that kind of cronyism is hard to see. “That’s not something you’re going to pull off the 990.”

Borochoff says that there is, in fact, no good formula involving only the 990 forms, which is one of the reasons he starts with the audit. “The 990 is not audited and it’s not as substantial a document,” he says. “There tends to be more misreporting in the 990 than in the audit, though there’s certainly some useful information there. But those boxes that people fill in—they might put in some things that don’t really belong in those boxes. At least in the audit they have to itemize it or write some description.”

Colpitts agrees. “I’m a CPA by training and I would be skeptical about some of that information because … a nonprofit can allocate their expenses a number of different ways, and I think if somebody was trying to hide expensive marketing expenses and they wanted to be tricky about it, I think they could do that in their 990.”

As for getting hold of audits, Borochoff says many states, such as Illinois, make them available online. Illinois state law requires charities to have an audited financial statement if they have $300,000 in gross receipts (you can find financial statements at http://www.illinoisattorneygeneral.gov/charities/search/index.jsp). Many other sites have become available on the Web in the last five years or so. (Miniutti says one poster on Charity Navigator reported using the site during a telefunder call, and claims that when the charity’s poor rating was asked about, the telemarketer hung up.)

But Borochoff says that in general these kinds of ratings aren’t served well by formulas. “In non-profits, you can’t take it at face value and do what Charity Navigator does,” he says. He says his group is more stringent about financial ratios and things like how much a charity hoards. “We feel that if they’ve already got more than five years’ worth of their budget in reserve [not lands, buildings or restricted endowments] then we give them an F grade. Everybody should draw the line with what they consider reasonable for the charity to already have because they don’t really need your money. There’s another cause that needs your money.”

Because the research is more intensive, Borochoff’s organization only focuses on 600 charities. (“It’s not a robo-rating,” he says.) The group puts out its newsletter three times a year and has started charging $50 annually. In the spring he says it’s going to revamp its CharityWatch Web site.

Charity Navigator started as a private foundation with a few donors and is now broadening its base and transitioning into its own public charity. Miniutti says her site allows a broader view of more charities. She says that in the research they have done, “we’ve rated almost 6,000 charities now, and the vast majority of them can hit that 75%/25% benchmark ratio” of programs to fund-raising.

Colpitts says that when she vets local charities, she usually calls a local community foundation or a United Way for background research. She tells clients to think about how they want to give before they get a phone call.

“I will always encourage them to not be reactive in their giving, to be thoughtful in advance,” she says. “Who does good work, who do I know of that I come in contact with and how much would I want to give them? Making that decision at 7 p.m. on a Tuesday night because they happen to call you is probably not good philanthropy.”